Economics research supports higher minimum wage for contractors

President Obama has announced that as of January 2015, all new federal contractors will be required to pay a minimum wage of $10.10.

This executive order is grounded in the economics research. First, there is evidence that paying workers above a market-clearing wage can improve economic efficiency. In efficiency wage theory, employers may opt to pay above the “market clearing” wage in order to improve productivity or reduce turnover, either of which are good for the firm and the economy more generally. The idea that there are “information asymmetries” in the labor market was an important contribution of Berkeley professor George Akerlof and Columbia professor Joseph Stiglitz that led to their receiving the 2001 Nobel Prize, along with A. Michael Spence.

Second, there is a large body of literature pointing to the conclusion that raising the minimum wage does not have a negative employment effect. By looking at the difference in employment between states or counties with different minimum wages, careful empirical work has found that modest increases in the minimum wage have no significant effect on employment. Specifically, research by Arin Dube, of the University of Massachusetts, Amherst, T. William Lester, of the University of North Carolina, and Michael Reich, of the University of California, Berkeley, found no significant employment effect after looking at all differences in the minimum wage from 1990 to 2006.

Heather Boushey is the Executive Director and Chief Economist of the Washington Center for Equitable Growth

January 28, 2014

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Minimum Wage

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